Lessons for Arizona Contractors: Construction Case Law Roundup

Slaton Bros. SW, LLC v. Bozrah Builders, Inc. (memorandum decision)
April 14, 2011

Important to Contractors: (A) Under the Arizona Prompt Payment Act, late payments to a contractor or subcontractor bear interest at 18%. However, interest does not apply to amounts that are found to be overbilled. (B) A violation of the Prompt Payment Act does not automatically prevent a defendant from seeking completion costs.

Background: Slaton and Bozrah entered into agreement for Slaton to build a retaining wall at a residence owned by Bozrah. Slaton claimed that it completed the project and billed the total contract price ($121,000). Bozrah disputed that the project was complete and paid Slaton $69,000. Slaton walked off the job and submitted five additional invoices. Bozrah did not object in writing to the invoices, claiming it did not need to do so because the invoices contained numerous charges that were not in the contract.

Slaton sued Bozrah under the Arizona Prompt Payment Act, and Bozrah counterclaimed for the cost to complete and repair Slaton’s work. The trial court found that Slaton “grossly overbilled” for its work and that it was entitled only to an additional $38,000. The trial court also found that Bozrah could not recover completion costs because it failed to object in writing to the Slaton’s invoices. (Without a written objection, the invoices were certified as due under the Prompt Payment Act). As a result, Bozrah was also ordered to pay interest on the unpaid balances at the Prompt Payment Act rate of 18% per annum ($68,000). However, Bozrah was awarded $60,000 for repair of defective work performed by Slaton. Both parties appealed.

Discussion: On appeal, Bozrah argued that Slaton was not entitled to 18% interest on amounts that the court found were overbilled. The Court of Appeals agreed, explaining that “if a contractor was permitted to recover prejudgment interest on all amounts invoiced, even those amounts disallowed after trial, there would be an incentive for contractors to overbill…” The Court also reversed the trial court’s refusal to award Bozrah’s completion costs, finding that a violation of the Prompt Payment Act does not automatically prevent a defendant from seeking completion costs. However, because the Court did not have enough information to differentiate between “completion costs” and “repair costs,” it ordered the trial court to recalculate the two as a single offset.

Cook v. Orkin Exterminating Co., Inc.
May 19, 2011

Important to Contractors: (A) A contractor does not have a fiduciary responsibility to a party with which it contracts unless the contractor expressly agrees to act as a fiduciary for the other party. (B) Where there is a contract between the parties, the economic loss rule prohibits one party from suing the other in tort. (For more information on the economic loss rule, see “Economic Loss Rule Applies to Construction Cases, Supreme Court Rules.”

Background: Cook sued Orkin, in tort and in contract, because Orkin’s termite treatment was ineffective. Cook claimed that Orkin breached a fiduciary duty owed to Cook. Orkin argued that Cook’s tort claims were barred by the economic loss rule and that Orkin owed no fiduciary duty. The trial court granted Orkin summary judgment, and Cook appealed.

Discussion: On appeal, Cook first argued that Orkin owed a fiduciary duty because it held itself out as an “expert” in the field of pest control (much like a contractor holds itself out as an “expert” in construction). The Court of Appeals disagreed, holding that the law does not create a fiduciary relation in every business transaction involving one party with greater knowledge, skill or training, but instead requires a unique intimacy or an express agreement to serve as a fiduciary (as with an accountant or lawyer). The Court further found that, because there was a contract between the parties, the economic loss rule prohibited Cook from suing Orkin in tort. Therefore, the trial court’s rulings were upheld.

Continental Lighting & Contracting, Inc. v. Premier Grading & Utilities, LLC
June 1, 2011

Important to Contractors: If a loan that is superior to a mechanics’ lien is refinanced, the new loan generally retains the same priority as the loan that it replaced.

Background: In August 2005, a real estate developer took out a loan to buy 10 acres in Apache Junction and refinanced the loan three times during the following three years. The developer contracted with Premier Grading to serve as the prime contractor. Premier subcontracted with Continental Lighting to perform work on the property. Both contractors liened the property in May and February of 2008, respectively. The developer ultimately defaulted on the loans, and Premier and Continental both filed lien foreclosure actions against the lender. The lender moved for summary judgment, claiming that the refinanced mortgages had priority over the mechanic’s liens under the Doctrine of Equitable Subrogation and the Doctrine of Replacement. The trial court denied the lender’s motion to dismiss, and the lender appealed.

Discussion: Typically, a mechanic’s lien takes priority over encumbrances recorded after the lien. However, under the Doctrine of Equitable Subrogation, a subsequent lender who supplies funds used to pay off a primary and superior loan may be substituted into the position of the primary lender/lienholder, despite the recording of an intervening lien. However, the Court of Appeals held that, because the Doctrine of Equitable Subrogation does not apply in a single-lender transaction (i.e., the lender refinanced its own loan), the Doctrine was not applicable here.

Under the Doctrine of Replacement, if a senior mortgage is actually replaced with a new mortgage (as in a loan modification), the new mortgage retains the same priority as its predecessor. The Court of Appeals found that the Doctrine of Replacement applied in this case, reasoning that it would be impractical to deny a lender and borrower the flexibility to restructure a loan in this ever-changing economic and business landscape. However, the Court limited the lender’s priority to the amount of the original loan.

WB, The Building Company, LLC v. El Destino, LP
June 2, 2011

Important to Contractors: (A) An unlicensed construction company cannot use a license held by its parent company. (B) A contractor who was not properly licensed at the time it entered into a contract cannot use Arizona’s court system to sue for non-payment.

Background: Wright Brothers, an Iowa construction company, formed “WB, The Building Company, LLC” to manage its residential construction division. Wright Brothers maintained control over its commercial projects. In March 2006, El Destino contracted with WB to develop property in southern Arizona. WB eventually sued El Destino for nonpayment, and the lawsuit was stayed so that the parties could go to arbitration, pursuant to the contract. During arbitration, it was discovered that WB did not possess a contractor’s license at the time of the contract, and therefore, it was prohibited from suing. The trial court lifted the stay and granted summary judgment to El Destino. WB appealed.

Discussion: On appeal, WB asserted that it substantially complied with Arizona’s licensing requirements because its parent company, Wright Brothers, had an Arizona contractor’s license during the project. WB argued that, since the two entities shared the same management and employees, Wright Brothers’ license should have satisfied the licensing requirements for WB. The Court of Appeals rejected WB’s argument, stating that the fact that Wright Brothers was licensed confirmed that WB’s directors knew of Arizona’s licensing requirements, and therefore WB had no excuse for contracting without a license.